Are banks’ internal investigations still privileged?

Summary: Financial institutions have developed a trusted template for responding to recent major regulatory controversies. Faced with a regulatory investigation, banks today will usually form an internal working group to take ownership of the issue. That working group will in turn hire a law firm to carry out an internal investigation and report back. The bank will then use the law firm’s report as a basis for engagement with regulators confidentially on a potential settlement.

Financial institutions have developed a trusted template for responding to recent major regulatory controversies. Faced with a regulatory investigation, banks today will usually form an internal working group to take ownership of the issue. That working group will in turn hire a law firm to carry out an internal investigation and report back. The bank will then use the law firm’s report as a basis for engagement with regulators confidentially on a potential settlement.

The intended advantages to this model are practical and protective. The law firms can bring to bear the resources and forensic rigour to demonstrate to regulators that the bank has done a thorough job of identifying and isolating past issues. And legal advice privilege cloaks the investigative process, while without prejudice privilege protects the dialogue with the regulator. These privileges enable the bank to restrict access to documents in any subsequent court claims by customers seeking to capitalise on adverse regulator comment. Following the recent decision in the Property Alliance Group Limited v RBS case, the extent of those privilege protections is now in doubt.

New developments

Last week the High Court ordered RBS to provide to the court for review high level documents relating to the work of its “Executive Steering Group”, or “ESG”, formed to look at LIBOR misconduct. Mr Justice Birss said the bank had “not satisfied me that the claim to legal advice privilege in relation to high level ESG documents is correctly made”.

This was a surprising remark. Normally if a litigant says a category of documents is privileged it can be hard to second guess that. But here the judge perceived ambiguity over whether the ESG’s role was just seeking and receiving advice from its lawyers on the regulatory investigations, or more broadly to “oversee the investigations and potential litigation”.

The difference was significant. Legal advice privilege covers communications between lawyer and client for the purpose of seeking and receiving legal advice. So if the ESG’s role was just getting legal advice a broad claim to privilege in its documents ought to stand. But if the ESG had a broader remit doubt might arise over whether, as the judge said, “the totality of its meetings can have been for the purpose of imparting legal advice”. For example, the judge wondered whether one purpose of the ESG might have been to inform the bank about factual findings, which would not attract privilege. The judge resolved this uncertainty by ordering that the documents be provided to the court for it to determine whether privilege could be claimed.

Without prejudice?

Another category of disclosure sought was communications between bank and regulator in the course of negotiations that led to an FCA Final Notice sanctioning the bank for manipulation of JPY and CHF LIBOR. Generally the judge accepted that these negotiations could attract the same “without prejudice” privilege that protects settlement negotiations between litigants.

However, the bank had said in its defence to the claim that it had not been found guilty by regulators of misconduct regarding GBP (as opposed to JPY or CHF) LIBOR. The judge decided that this put the negotiations into issue because it begged the question whether there was no reference to GBP LIBOR in the Final Notice because there had been no misconduct for that benchmark, or if it was a negotiated outcome. So the bank was treated as having waived privilege in those negotiations, to the extent they shed light on that question.

Just legal advice?

These conclusions may have wide implications for banks. Questions might be asked about the working groups overseeing numerous other major internal investigations. Have they limited their role to receiving legal advice? Have findings only been used for dealings with regulators? Or have they provided feedback to banks’ boards on lessons to be learned? And how candid can banks be in negotiations with regulators that may not remain private?

In other contexts the courts have often been wary of broad privilege claims over complex projects going beyond the traditional advisory lawyer-client relationship. There are parallels with the issues in Three Riversin 2004 over privilege in the Bank of England’s internal investigation into the BCCI collapse. The approach to some aspects of this case do not sit well with that decision. In any event, it seems now a high degree of judicial scepticism is being applied to these circumstances.

Given what is at stake in numerous regulation related claims against banks this decision may not be the last word on the issue. It is now notoriously difficult to appeal the High Court’s interlocutory decisions though, and previous trips to the Court of Appeal in similar cases have produced mixed outcomes. Banks’ working groups will in the meantime want to consider carefully whether their activities might produce useful guidance not just for the bank but for opponents in future litigation.

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